GST changes at Guwahati

The government carried out the required course correction at the meeting

In public finance, a common saying is that tax administration is 70 per cent tax policy. Happily in Guwahati, this taxation truth was accepted and the changes announced will help make the goods and services tax (GST) what the Prime Minister called “a good and simple tax”.

First of all, let us look at the important area of rate rationalisation. Earlier, the rate fitment committee, based on the guidelines of the GST Council, sought to fix GST rates on various items based on the principle of “duty equivalence”. This led to a large number of consumer items being placed in the 28 per cent duty slab. This created a lot of incongruities — washing soap was kept at 18 per cent while washing powder was placed in the 28 per cent rate slab. The GST Council, at its Guwahati meeting on November 10, abandoned “duty equivalence” as a principle.

The GST implementation opportunity ought to have been used to completely realign rates on the basis of certain principles like broad base of consumption, avoiding high rates of duty on inputs/intermediates to prevent accumulation of duty credit on account of inverted duty structure and prescribing low GST rates on goods produced by small and medium enterprises. The rate setting in the past few GST Council meetings culminating in Guwahati has, through a process of trial and error, converged into a simpler and more rational rate structure. The incidence of indirect taxation right across the manufacturing sector has probably dropped, after changes in Guwahati, by between 5 to 10 percentage points. This will help boost manufacturing growth by stimulating demand and creating an expanded market. The removal of entry tax, post GST implementation, contributed to this salutary trend by reducing the costs of interstate trade compared to intra-state trade. The simpler tax structure will make tax administration easier in a number of ways. It will reduce classification disputes through convergence of rates; disputes about what is a “good” and what is a “service” would be obviated. Further litigation may also come down.

The other big takeaway from the Guwahati meeting was the recognition that the GST implementation did impose a compliance burden on small and medium enterprises, especially the mom-and-pop stores operating locally in the B2C segment. This segment has been broadly covered under the composition scheme. These units under the composition scheme up to an annual turnover of Rs 1.5 crore will pay a flat rate of one  per cent (covering both traders and manufacturers). These units file a quarterly return that is simple and they are also exempt from the whole process of invoice matching as they fall outside the input duty credit scheme.

The restaurant segment is an extremely important one in India, for it employs a large number of people and significantly contributes to the gross value addition in the services sector. The entire restaurant sector, except the restaurants located in hotels where room tariffs are more than Rs 7,500 per day, have been placed in the five per cent duty bracket (AC and non-AC distinctions have been done away with). The only caveat is this sector will not be eligible for taking ITC — a price they have been asked to pay for not passing on the input tax credit to consumers soon after the GST implementation on July 1. Certainly, this policy will go against the grain of the GST system, but perhaps the government here wanted to send a stern message that profiteering at the expense of consumers will have consequences.

Finally, the decisions at the Guwahati meeting also addressed the main concern that the GST regime placed a significant compliance burden on small and medium enterprises. The elaborate design of the invoice matching system based on sequential filing of GSTR-1, GSTR-2 and GSTR-3 has been temporarily postponed. A committee under the CEO of GSTN has been constituted to relook at the design of the GSTR-2 and GSTR-3. Matching of invoices will be done at a summary level with GSTR-1 and GSTR-3B until March 31, 2018.

In short, the GST meeting in Guwahati was in some sense a watershed moment where the government has done some much needed course correction.

The author is national leader, Tax & Economic Policy Group, EY India